11 January 2009

Facing economic realities - a desperate need to kick ass on both sides of the Atlantic

With the imminent departure of Dubya's Dumbass Duffers from the White House and the US Treasury, we can now see the full scale of the economic horror awaiting President Barack Obama. US employment fell by a post-war (that's World War II, not the Iraq war) record 2.6 million in 2008 and in all likelihood there is worse than that to come, with unemployment likely to go into double figures by 2010 - the worst figure since the 1930s. 

Obama is proposing an $800 bn stimulus package to reflate the economy, which sounds on the face of it like a Big Number, until you read Paul Krugman's latest New York Times column and realise that the 'output gap' - i.e. the value of foregone US production resulting from rising unemployment - is estimated to be over $2 trillion over the next two years. The Obama stimulus plan doesn't even amount to half of the gap (unless it's $800bn per year of course, something that isn't clear from Obama's pronouncements so far - which have been limited). 

Furthermore, 40 per cent of the package is tax cuts - which in current circumstances, are unlikely to boost demand as much as spending increases because people may just save the tax cut rather than spending it. (It's great to be back to good old-fashioned Keynesian economics, kids). 

Why is the Obama administration being so timid? (If, of course, it is going to be that timid - maybe plans will be radically expanded when Obama actually gets into the White House). One possibility is that Obama is trying to go for a conciliatory bi-partisan approach, meeting the Republicans (some, although not all, of whom, are anti-stimulus) halfway. This is the patented Bill Clinton approach to running a Democratic administration and it sucks big time. The USA surely did not vote Obama in just so he could be a more lightweight version of George Bush. It is time to kick some ass out there, and a bold approach now will reap more rewards later than pussyfooting around trying to appease redneck fascist Republican Senators. If Krugman is unwilling to take a job in the administration at any price (which seems to be the case) then the administration should at least listen to him as The Voice of Reason. Other sane voices in US economics, such as James Galbraith of the University of Texas (author of the superb The Predator State) also need to have the ear of the Government. Get that $2 trn stimulus out the door pronto!

Similarly, after a very good autumn, support for New Labour in the UK seems to have fallen away somewhat as people realise that the partial nationalisation of the banks was a holding action rather than the solution to the non-lending problem. New economic data from the UK is looking absolutely abysmal - for example, the fastest contraction of output since 1980 (when the Tories were deliberately trying to wreck the economy!) Down 1.5% in 3 months - 1.5% in a year would have been seen as disastrous, but in one quarter, that's unbelievably bad. 

The latest news reports suggest that the Government will step in and guarantee mortgage lending - for sure, that might be an improvement on the current situation, but it would still leave exactly the same set of idiots running things. Surely a better alternative would be for the Government to take over the entire banking sector and start lending out to businesses based on long-term assessments of growth prospects rather than not lending based on short-term fears of insolvency? We do need really drastic action - even more drastic than we've already had - to sort this one out. And, based on previous observation, the more drastic Gordon gets, the more popular he gets - so why not take this one all the way? Forward to the 1983 Labour Manifesto...

4 comments:

Van Patten said...

Even assuming your new idol Krugman is correct, what exactly is the money going to be spent on? In any public pronouncement any details of what the expenditure element of the stimulus package will provide appear remarkably vague. The government is thus to put in 800 billion (or £2 trillion!!) a year doing what? Keeping plants that are about to be mothballed open? Forcing the US consumer to buy overpriced goods from his/her own country rather than cheap imports (sounds almost like a story from my old adversaries in Pyongyang, where Kim Jong-il's brother in law has restricted contact with China on the grounds that 'ideology is more important than survival')? The devil is in the detail, unless like in your plan, there is no detail at all!

Meanwhile, desite your continual efforts at historical revisionism regarding the 1980's, (you sound like Derek Robinson by the way - change the record) you offer no greater details regarding your prescription for the UK economy. You appear to be advocating that the DTI (or some as yet unknown agency) take over the long-term funding of UK PLC, as they are 'best placed' to assess 'long term growth prospects' for the economy. Given the public sector's abysmal record on wastage, this I can only presume is a bad joke. No doubt about £20 billion would have been ploughed in to protect Woolworths and others in the retail sector on the grounds that to do otherwise would cause suffering - thus a store without a raison d'etre, and bereft of customers would have been kept on life support for how long? Sadly, the only countries doing what you advocate here (pouring in money without the slightest regard for what or where it is spent)appear to be a few bankrupt third world dictatorships. Let's hope for the sake of us all that noone is daft enough to follow your advice here - if they do, I think a rerun of the 1930's won't be the half of it.

giroscoper said...

I don't think anyone's seriously suggesting we needed to prop up Woolworth's. But what's your solution? Leave lending to the banks and watch as huge swathes of the UK economy go bust? Great stuff.

Van Patten said...

If you wish to sneer at the proposed solution (which is to do nothing)be my guest - Sadly, you may have no option but to 'do it my way'. There's no evidence that any of the much mooted bailout strategies in either the UK or the US has had the impact required. Are we thus to throw more money in in a vain hope of arresting the inevitable falls in output caused by correcting a massive level of overconsumption?

In addition, you've failed to specify a single project that the 'stimulus package' consists of - Are we following Milton Friedman and simply 'helicopter dropping' the money into people's gardens or is it for specific infrastructure spending? You know as well as I do that any public expenditure boom in the UK is likely to be wholly non-productive, so where is the benefit? Paper manufacturers? Employment Tribunal members? I appreciate that no great thrill of 'moral superiority' results from 'doing nothing' but you appear bereft of alternatives bar that of printing money - Is the inevitable comparison with Harare as far-fetched as some might believe?

giroscoper said...

I think the 'do nothing' strategy would lead to terrible costs in terms of unemployment, falling living standards and the collapse of the global banking system. The consequence could be the establishment of a string of fascist (or indeed communist) dictatorships in Europe and North America, parallelling the fate of much of much of Latin America in the post-World War II period.

It may be of course that some in the outgoing Bush administration actually want this to happen... fortunately saner voices have prevailed.

There are a huge number of potential public infrastructure projects which could be embarked upon to reflate the economy... what about building a world-class public transport system rather than the mess we have at the moment?